The number of community banks approved for the Treasury Department’s Small Business Lending Fund (SBLF) capital has swelled in the past few weeks, adding up to about 80 recipients and more than $1 billion disbursed, according to data released today. Despite the flurry of approvals, however, it appears the program will end up being a far cry from what was envisioned last September, when Congress allocated $30 billion to increase loans to small businesses.
The Treasury has only about six weeks left to disburse funds, since the program officially closes on September 27. While officials have been closing deals steadily since late June, when the first funds were disbursed, the work has been slow. One obstacle, according to the Independent Community Bankers Association, is the Federal Reserve, which has been slow to lift the restrictions some banks face on making dividend payments, a restriction that bars them from the program. Another is the need for banking regulators to approve the applications before the Treasury can make a decision, Treasury Secretary Timothy Geithner noted to Congress earlier this summer.
Even if the Treasury were able to approve all of its applications, the total capital infusion will fall short of the $30 billion mark, and of the $17.4 billion that was allocated for it in the President’s February budget. In July Geithner reported to Congress that 926 banks had applied for only $11.8 billion before the application window closed.
The net effect on small-business lending is unclear. What is clear is that the SBLF is a great deal for some banks, many of which are using at least part of the funds to repay previous borrowings under the Troubled Asset Relief Program (TARP).
Take Simsbury Bank & Trust (SBT), a bank with $335 million in assets based in Simsbury, Connecticut. The bank announced last week that it had been approved for $9 million through the SBLF, at a weighted average cost of 3%. Slightly less than half of that money went to repay the bank’s outstanding TARP obligations, leaving it with $4.8 million for new loans and a pass on having to do a capital raise at much higher rates.
“We feel very fortunate that we were eligible,” says SBT CFO Anthony F. Bisceglio. “This capital has given us the ability to keep on growing.”
The deal only gets sweeter, in fact, since the borrowing rate goes down as small-business lending goes up. The bank can count its qualified loans over the past year, so it needs to lend only $3 million more to small businesses before it gets the lowest available rate (1%) on the whole loan, says Bisceglio. That means on the TARP payback portion in particular, the rate will drop from 6.5% to 1%, saving the bank more than $225,000 per year.
Banks must resubmit their loan balances each quarter to the Treasury, and rates are recalculated accordingly, depending on the changes. The lowest rate is 1%, while the maximum is 5% in the near term, 7% within two years if banks don’t increase lending, and 9% in four and a half years, regardless of lending volume.
The variable interest rates mean the SBLF is essentially “a very nice, well-constructed bridge” to a future capital raise, says Bisceglio, but one that gives the bank some savings and more flexibility on timing.
That kind of relief could give many banks more incentive to say yes to small businesses in need of capital. Still, the SBLF program is not necessarily going to create a large number of new loans, in the aggregate. As surveys by the National Federation of Independent Business have long indicated, most small businesses are stunted by weak consumer demand rather than lack of access to capital. “The demand for loans is not terrific, so it’s not so much that the market is growing, it’s more that we’re gaining a little bit more of our share of the market,” says Bisceglio.
That being said, the SBLF has done its share to help the budget deficit. Besides coming in well under budget on funds disbursed, the program also managed to undershoot its budget for operational costs. The program will cost taxpayers an estimated $40 million to administer, largely in a category called “custodian and infrastructure provider” fees, Geithner reported in July. That’s 27% under the original budget of $54.7 million.